Question ID: 2200
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Own Funds (OF)
Article: Article 9,15, 76 of the Delegated Acts; Article 75 of SII Directive
Template: S.23.01
Status: Final
Date of submission: 29 Sep 2020
Question
Article 76 of the Delegated Acts requires firms to recognise an amount, equal to the value of net deferred tax assets, as tier 3 own funds. Can you confirm whether or not the net figure is calculated at the entity level (i.e. is row R0040 less row R00780) or if restrictions on netting apply? For example, an insurance entity may contain a number of ring fenced funds whose assets cannot be used to support each other or the remainder of the business. In this case would it be correct to net the deferred tax liability of one fund against the deferred tax asset of another? Conversely, the firms remaining part contains no restrictions on its assets supporting the other parts of the business. Would it be correct to net a deferred tax asset in the remaining part against a deferred tax liability within a ring fenced fund? Finally, Article 330 of the Delegated Acts permits netting for group returns provided the asset and liability arise from one member state or third country and the tax authority permits such offsetting. Can you confirm whether or not this requirement would also apply to the netting of the DT position at the individual entity level?
Background of the question
EIOPA recognises that deferred tax assets may be less useful, in supporting the Solvency of insurance companies and groups, compared with other more liquid assets or assets that are not dependent on the emergence of future profits for their value. It has placed restrictions on these assets such as recognising them as tier 3 own funds and limiting their recognition at group level where the asset is within a subsidiary undertaking. However these restrictions apply to the net position and while clarification has been provided as to the level of netting permitted at group level (i.e. in Article 330 of the Delegated Acts and Q&A 1017 of the Q&A) there is no specific guidance on the treatment of ring fenced funds.
EIOPA answer
As per Article 15(3) of the Delegated Regulation (EU) 2015/35, a Deferred Tax Asset (DTA) needs to be valued taking into account any legal or regulatory restrictions on the ability to utilise that asset. This should include any restrictions which arise from the existence of ring-fenced funds.
After all restrictions have been incorporated within the valuation, netting of the overall DTA and DTL amounts at entity level would be appropriate, and any net amount of DTA can be recognised as Tier 3 own funds. Please find further information related to the reporting in Q&A 2354.
As stated in Article 9 of the Delegated Regulation (EU) 2015/35, insurance and reinsurance undertakings shall value assets and liabilities in accordance with international accounting standards adopted by the Commission pursuant to Regulation (EC) No 1606/2002 provided that those standards include valuation methods that are consistent with the valuation approach set out in Article 75 of Directive 2009/138/EC.